Question

Molly Restaurant had the following transactions for the month of May, 2015:

         i.            Purchased stove for $3,000

       ii.            Purchased Mixers for $1000

     iii.            Petrol cost for Delivery Vehicles, $800

     iv.            Paid $300 to add Spoiler to Delivery Van and $200 for repairs.

       v.            Purchased another stove for $5,000

     vi.            Incurred expenses of $400,000 to add a room to the restaurant

    vii.            Repainted the restaurant for $300

Management would like to better understand the nature of each transaction.

You are required to:

a.        Classify the following items into Capital and Revenue Expenditure.

b.       Briefly explain your reason for each classification to management.

Answer 1

To,

The Management of Molly Restaurant.

Respected Sir/Madam,

Following are the itemised classification into Capital & Revenue Expenditure on the basis of definition of Capital Expenditure & Revenue Expenditure.

Capital Expenditure means such expenses which are incurred by the enterprise for its future benefits. Such expenditure gives the benefits over the period of its Useful Life. For example any amount incurred towards Plant & Machinery

Revenue Expenditure means such expenses which are incurred by the enterprise during the specific period on recurring basis. It incurred the expenses frequently. For Example Stationery items purchased, Salary of the employee etc..

Item i) Purchase of Stove $3000 :- Capital Expenditure. It is not a recurring expenditure hence it is a capital expenditure.

Item ii) Purchase Mixer $ 1000 :- Capital Expenditure. It is not a recurring expenditure hence it is a capital expenditure.

Item iii) Petrol Cost $ 800 :- Revenue Expenditure, It is a recurring expenditure.

Item iv) Cost of Spoiler $300 Repairs $ 200 :- Revenue Expenditure. It is a recurring expenditure. Cost of Spoiler doesn't improve the performance of Delivery VAN.

Item v) Purchase of another Stove $ 5000 :-Capital Expenditure. It is not a recurring expenditure hence it is a capital expenditure

Item vi) Addition to Restaurant $400000:- Capital Expenditure. It Increase the value of Restaurant.

Item vii) Repainted of Restaurant $ 300:- Revenue Expenditure. It is a recurring expenditure.